At the heart of the successful operation of any company is the process of competent management, consisting of connected components: sale, purchases, production, marketing, personnel, and so on. Since any action of the company is reflected in the monetary value, it is possible to determine the degree of impact of each element on each other by analysing the financial component of the organization.
It is known that, information about the financial condition of an organization is disclosed in its accounting reports. This type of reporting is open for publication, and in certain cases should pass the mandatory audit procedure. The information in the accounting reports is presented in accordance with the legislation of the Russian Federation: exclusively in monetary terms and in chronological order. Such reporting is focused on external users: tax authorities, banking sector, suppliers, and buyers.
However, the figures of accounting reports do not allow to consider in detail the processes taking place in the company, diagnose the state of the organization and plan its activities. The most effective tool that allows to analyse, detect problems, determine the operating procedure to correct them and form a strategy for the company’s development is the formation of management accounts.
Management accounts is an integral part of accounting reports and contain information about the company’s assets and capital, income and expenses, as well as the results of its work. The difference between these two forms is the degree of purpose: in management accounting, it is broader and based on certain principles.
The first principle is the focus of application. The user of management accounts is the organization itself, and its data is intended for the following persons:
The second principle is confidentiality. Management accounts information is a company’s trade secret, which is why it is so unique in terms of content and completeness of data.
The third principle is legislative regulation. The legislation of the Russian Federation does not establish a clear procedure for drawing up management accounts, therefore organizations independently determine the rules for its formation, depending on the type of activity.
The fourth principle is the reporting period of drawing up and procedure of submitting. Management accounts is considered effective if it is drawn up on a regular basis (quarterly, monthly, or even weekly). This increases the degree of detail of figures and improves the quality of the analysis. Since management accounts is intended for internal needs of the company, it is not necessary to provide it anywhere, except for internal users.
The fifth principle is the significance and clearness of information. Management accounts information should be clear to the user and not contain unnecessary information. Data integrity and correct decisions depend on this.
In contrast to accounting reports, the composition of mandatory forms of management accounts is not established by the legislation of the Russian Federation. Therefore, the procedure for drawing up documentation is arbitrary, and its quantity and range of options are quite extensive. However most often companies use the following main types of management reports:
The cash flow statement (referred to below as CFS) reflects the company’s cash flows and answers the following questions: “How much money did the company receive?”, “What did it spend on?” and “How much money does it have left?”. The document is drawn up in the context of three types of activities for which there is an outflow and inflow of cash: operating, investment and financial.
Operating activities reflect monetary funds from the company’s main operation in the following processes:
– payments to suppliers;
– revenue from sales;
– payment for lease
– salary payments to employees;
– dividends from shares of other organizations
The financial resources that the company invests and that are able to bring it certain benefits in the future are reflected in the section of the report “Investment activities”. Most often it contains the following information:
-purchase of property, plant and equipment and intangible assets;
– long-term monetary contributions;
– planned investments and capital contributions;
– performance of investment projects.
The financial activities section contains information about changes in the organization’s capital and borrowings.
The Profit and loss statement reflects the results of company’s work, generates its profitability, and records the following figures: income and expenses, revenue, and profit. The structure of this report is very similar to its accounting form, but the difference will be in the degree of detail of each figure (including for each division) with detailed explanations.
The balance sheet statement is analogous to the balance sheet report, but in contrast to the second one, it contains not only numerical figures, but also their interpretation in terms of the effectiveness of the company’s business model. The document is drawn up on the basis of data from the CFS reports and the Profit and loss statement, and contains the following information: accounts payable and receivable, the amount of work in progress, the amount of mandatory taxes.
All the main report forms can be drawn up based on the accounting reports information, adding the necessary adjustments and details, or keep two types of accounts in parallel – the choice is up to the company.
Apart from the main reports, the organization can also form additional reports, such as:
It is possible to draw up management accounts manually in paper form, in electronic form using tables and graphs, or automatically through special programs.
Proper drawing up of management accounts is only half of the success. After all, apart from reflecting all the necessary data, it is required to conduct a comparative analysis of each figure and assess the effectiveness of the organization’s activities for the reporting period. There are two purposes for conducting analytical procedures:
For example, in the context of the profit and loss statement it is possible to use such figures as:
The following figures can be taken from the balance sheet statement for analysis:
The choice of figures used in the future should be made very carefully, as this will affect the correctness of managerial decisions and the likelihood of serious errors.
Any process begins with setting goals and tasks. The process of formation of management accounts is no exception and consists of the steps presented below.
After all the necessary procedures for implementing reporting have been completed, it is recommended to fill out management forms, but using only the data that is real at this moment. The completed reporting forms should be approved by its internal users for adjustments and additions.
Despite the fact that management accounts are very useful tool for business management, most companies are in no hurry to use it in practice. First of all, this is owing to the labour intensity of the process in terms of resources, funds and time spent to form a well-tuned system that can pay off.
Secondly, business representatives often do not perceive management accounts as a necessary and crucial element in the accounting system, since it is not mandatory in nature, in contrast to accounting reports.
Thirdly, the scope of information processed in management accounts is much larger, since each figure is evaluated in detail.
Fourthly, it is possible to encounter a lack of the necessary skills of specialists who are able to form such reporting. Most often, employees are self-trained in the drawing up of management accounts, based on the special characteristics of the company’s activities, while not always the knowledge obtained can be applied in practical terms.
Therefore, most companies, in order to save funds and resources outsource the process of drawing up management accounts. A reliable provider guarantees your business stable growth and development, and also has the following advantages:
A team of professionals who have all the necessary competencies for drawing up management accounts in an accessible and understandable form and in accordance with the requirements of your business works in Acsour.